Seeking an even keel for taxes

Eric Bailey

Still smarting from the latest budget fight, Gov. Arnold Schwarzenegger and legislative leaders are gearing up for a new battle -- a push to ease the state's chronic boom-bust cycles by radically altering the way we pay taxes.

A 14-member panel of political appointees dubbed the Commission on the 21st Century Economy has been meeting quietly since the start of the year to ponder potentially revolutionary changes.

As envisioned by Schwarzenegger and legislative leaders, the notion was to bring together a collection of mostly apolitical wonks to settle issues that deeply divide the Capitol.

It has not been easy.

The commission's final report, originally slated for release in April, has been put off as these get-it-done intellectuals risk descending into the partisan gridlock that plagues the Legislature.

They've talked of a carbon tax, boosted business property levies and rainy-day funds. They've wrestled over scrapping taxes on sales and corporations, substituting a broad business toll to spread the fiscal burden. They've haggled over a flat tax on income.

Although nothing is settled, Schwarzenegger has tried to light a fire under the process. He recently called for the commission to wrap up a final report by Sept. 20 and asked that the Democrat-dominated Legislature convene a special session to consider what to do next.

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'A critical moment'

"I'm hopeful," said Gerald Parsky, the Los Angeles businessman and former University of California regent who is the chairman of the tax commission. "I think we have a critical moment in time. . . . The people of California want policymakers to come together and act."

Others urge a more cautious process before launching into what they see as a massive statewide tax experiment that could produce both big winners and big losers.

"The devil is in the details -- and so is Santa Claus," said Richard Pomp, a University of Connecticut law professor appointed to the commission by Democratic leaders.

Many conservatives see altering the tax system as long overdue, a way to ease the volatility that has sent tax revenues soaring during good times and plummeting during bad.

But liberals worry that changes might disproportionately benefit the wealthy in a state that already has a yawning gap between its richest and poorest residents.

With repeated budget deficits dogging them, Schwarzenegger and Democrats agreed late last year to set up a commission to find middle ground.

Pomp served in the 1980s on the New York commission that modernized that state's taxation system. Other panelists include former Reagan advisor Michael Boskin, a conservative now at Stanford's Hoover Institution, and two former state lawmakers with reputations as wonks: former Republican Assembly Speaker Curt Pringle, now Anaheim's mayor, and Fred Keeley, a Democrat and former assemblyman who is now treasurer of Santa Cruz County.

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Consensus sought

At times the commission has seemed to cleave along partisan lines that in recent years have pitted business-friendly Republicans against Democrats eager to save the state's fraying health and welfare safety net.

Doubters still dog them, but Parsky sees a growing possibility that the panel may reach a consensus. Critics who see an ideological split "are about two commission meetings behind reality," he said.

But hot-button issues abound.

Democrats on the commission still want to address the split-roll property tax, tweaking the dictates of Proposition 13 to boost the levy on business. They also talk of an ironclad rainy-day fund and a tax on carbon-generating fuels dovetailing with the push by Schwarzenegger and Democrats to curb greenhouse gases.

The big focus is reducing the state's tax volatility, which arises in large measure from the reliance on personal income tax, particularly revenue generated by top wage earners.

Since 1950, income taxes have grown from 11% of the state's tax revenue to about 50% today. In recent years, the state's wealthiest 1% have generated the bulk of that -- roughly half of the total income tax take, and a quarter of the state's overall tax revenue.

Liberal critics say this simply reflects the astronomical rise in incomes of the super rich in Silicon Valley, Hollywood and other haunts of the wealthy. That revenue stream has tracked the rise and fall of the economy and stock market.

Talk on the commission of a total flat tax quickly tripped on political realities -- shifting more of the burden from the rich to the middle-class would never fly in a Legislature dominated by liberal Democrats. The idea has evolved into a compromise proposal to reduce tax rates across all income levels, with as few as two tiers of 2.75% and 7%.

Conservatives would also like to see the taxes on corporations and sales eliminated outright. That lost revenue, they say, could be replaced by what's called a business net receipts tax. That new levy would tap a far broader base of businesses, including service sector jobs -- lawyers, engineers, business consultants -- that are 21st century growth industries but don't pay sales tax.

Pomp, the Connecticut professor, has a different name for it -- a "stealth sales tax."

As he sees it, the new tax would be mostly a way to bypass the army of Capitol lobbyists who make sport of shooting down attempts to broaden the state's sales tax base.

Jean Ross, California Budget Project executive director, sees efforts by conservatives on the tax commission as "a smoke screen masking a hidden agenda" -- to shrink the state's tax revenue and the size of government along with it.

"This is a recipe for future budget crises," she said.

Schwarzenegger is pressing hard heading into his final year in office. Democratic leaders, however, say they're going to resist moving too fast. Many would rather expand the existing sales tax than introduce an entirely new levy.

"We have a responsibility to be careful and to get it right," said Senate President Pro Tem Darrell Steinberg. "I'm not going to be part of rushing anything of this magnitude."